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Are the Trump Tax Cuts Boosting U.S. Consumers?

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Americans have ramped up their spending over the last few months. Retail sales rose 0.8 percent in May, up 5.9 percent from a year ago, and now some economists are forecasting GDP growth near 4 percent in the second quarter, and 3 percent or better for the year.

CNBC’s Patti Dom was quick to attribute the spending boost to the tax cuts – “Armed with new-found proceeds from the tax bill, American consumers went shopping in May, driving retail sales — and economic growth — sharply higher,” Dom wrote – and some bank analysts agreed, with JP Morgan’s chief economist Michael Feroli writing that “consumers wasted no time enjoying their tax windfall.”

But other analysts downplayed the effect of the tax cuts, citing instead the steady, long-term gains in employment, the arrival of tax refund checks and rising inflation. “You can’t just attribute it all to tax cuts,” Chris Christopher of IHS Markit told MarketWatch.

James Pethokoukis of the American Enterprise Institute pointed out that the U.S. has seen dozens over “hypergrowth” quarters of 4 percent or better growth over the last few decades, but there’s little to suggest that the long-term trend toward a 2-percent-growth economy has changed. The tax cuts may indeed be providing an economic boost right now, Pethokoukis writes, but a new growth trajectory would require more fundamental changes – an artificial intelligence boom, say, or a huge surge in business investment – that would drive productivity significantly higher, and there’s no sign of those transformations yet.

As far as business investment goes, Pethokoukis quoted JP Morgan on the capex spending booming Republicans have been waiting for in the wake of the new corporate tax rules: “Business investment spending, which had been the star performer over the past year, actually looks close to flat this quarter, thereby chalking up its weakest performance in over a year.”